Revisiting the Barbell

It’s been a few years since people talked about the barbell theory and perhaps in that time LP commitments to the middle market have gotten a little pudgy. But are LPs hitting the weights again?

A few placement agents and a fund manager talked about the barbell effect in the first quarter. For those of you who aren’t familiar with it, the barbell theory refers to the way private equity investors tend to favor both smaller and larger funds, but nothing in the middle.

Kelly DePonte, partner at placement agent Probitas Partners, said the barbell range at the small end refers to funds smaller than $500 million, and at the top end $3 billion or so. LPs once again are seeing the value at the bottom end, which is less driven by auctions, and at the larger end, as mega funds are always getting first looks at deals, have the ability to price aggressively, and pile on debt.

DePonte noted that in the mid-barbell range there are a few funds looking to raise “a third or fourth fund that have grown very quickly and whose overall returns are driven by the first fund—often much smaller than their current vehicle—with very spotty recent results in a larger fund size.” Many LPs in this situation remain unconvinced that a GP can effectively invest a $1.5 billion fund the way they invested smaller funds previously, he added.

Shaun McGruder, a principal at Palm Beach Capital, which has raised $105 million of its $150 million target for its second fund, said being small has its advantages. Although some potential LPs have turned the firm down because it wants to up its investment in future funds, other LPs like the story. “We’re playing where big funds don’t want to play,” he said, buying companies in the $2 million to $6 million range.

“A lot of LPs are adopting the barbell strategy. It’s really the middle that’s being squeezed,” said Chris Caputo, MD at placement agent Fortress Group. He added, “We’ve seen quite a few mid-market buyout funds that just don’t look that differentiated. Given the number of them and the amount of dollars chasing deals, it might be a tough place to make money,” he said. —M.C.